SpotXchange’s Blog

By Will Richmond, Editor/Publisher, VideoNuze (www.videonuze.com)

Over time, as technology has created one new medium after another, one of the thorniest issues has been which business model to pursue. Each medium has resolved it in its own particular way. Now, as the broadband video medium continues to mature, the same question arises: which business model will be most prevalent?

There are really only 3 business model choices: either the consumer pays through subscriptions and/or a la carte payments, the advertiser pays, or both pay through some type of hybrid model. Surveying the media landscape, it’s possible to find examples of each of the three models.

For example, broadcast TV networks traditionally relied solely on advertising and still do. Yet cable TV networks derive both subscription payments (in this case from their customers which are cable TV, satellite or telco providers) and advertising revenues. Many newspapers also generate both subscription/newsstand revenues and ad revenues. Magazines follow a similar model. Conversely, in the entertainment business, movies tend to follow a premium model, with little-to-no reliance on advertising.

With so many different choices, it’s admittedly hard to say which model will prevail in broadband video. Yet researchers already expect broadband advertising to generate over $1 billion in revenue this year compared with just a fraction of this for the paid model. This and other evidence suggests that for the foreseeable future, for most broadband video, (movies are an important exception), the dominant model will be advertising-based. Following are 5 key reasons:

1. Consumer adoption of broadband is still relatively early
Though consumers viewed a record 11.5 billion video streams in March ‘08 according to comScore, on a per viewer basis, consumption is still relatively low. For many millions of early users, today’s broadband experience amounts to little more than watching random, funny clips that were emailed along. Though entertaining, most consumers could not envision paying for this type of content. As the medium matures and video quality improves, this will change. But for now, as with the Internet itself, many see “free” as the appropriate price point.

2. Broadband video is an extension of the booming Internet advertising model
In a sense, video is just a new format to be delivered online, following text and graphics. The good news for broadband video advertising is that the online ad industry (encompassing banners, search ads, etc.) is booming. Marketers from the biggest multi-national corporations to the smallest mom-and-pops now recognize and value the interactivity, targetability and measurability that online advertising uniquely offers. Broadband allows all of this as well, plus the emotional impact that only video can convey. As a result, broadband benefits from the tailwind that online advertising is creating.

3. Marketers looking for alternatives to TV
The benefits of the Internet and broadband coincide with a growing determination by the biggest brands to branch out beyond TV as their primary ad medium. Marketers are frustrated with the traditional TV ad model due to digital video recording and the subsequent ad-skipping it enables, time-shifting brought on by Video-on-Demand and rampant fragmentation, primarily fueled by the Internet and the social networking craze. Broadband’s benefits, as described above, plus its growing adoption, means brands can find their audiences and deliver far more engaging experiences to them.

4. Broadband still has significant limitations
When trying to get a consumer to pay for something new the value proposition must be at least equal to existing choices; to really succeed it needs to offer further distinctive advantages. The ubiquitous DVD format has raised a high competitive bar as the incumbent choice to broadband adoption. Though broadband delivery of premium content offers key convenience differentiators such as immediate gratification, significant downsides remain. These include limited devices on which to play the video, proprietary formats that limit viewing options, rights-related issues that hamper unlimited usage and lack of portability. None of these will be fully solved any time soon. As such, the DVD market will remain a strong incumbent for some time to come, limiting growth of the paid model.

5. Content providers familiar with the ad model
Last but not least, outside of movie studios, most media companies are familiar and comfortable with the ad business. It’s very natural for them to extend its use into the broadband medium. They already have ad sales teams which can be augmented to sell broadband ads. They can now offer multi-platform bundles to their clients which creates new value and differentiation. For some, such as print publishers (newspapers, magazines), broadband offers a whole new revenue opportunity, which capitalizes on their editorial skills. And as mentioned earlier, going the ad-supported route does not foreclose the chance to make some content available as a premium service, though at this point hybrid models have not yet gained much traction.

Summary
The broadband video industry is still in the early stages of its development, yet there are already clear signs that advertising is going to be the dominant revenue model for the foreseeable future. With countless firms developing and deploying the necessary infrastructure, the broadband video ad model will rapidly mature in the next few years.

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